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Recent research from the Association of Investment Companies suggests that 78% of investors plan to make use of their ISA allowance this year. 40% plan to use only the shares element , representing a 1% rise since last year, while just over a quarter plan to use both their cash ISA and investment ISA allowance, again representing a 1% increase on the previous year. more

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Savings and investment ideas to combat inflation

03 September 2013 / by Oliver Roylance-Smith

Despite last month’s 0.1% reduction in the Consumer Price Index, the headline rate of inflation continues at a level well above the 2% target and so it remains vital to consider all of your options in light of the impact inflation can have. We therefore provide you with a selection of savings and investments which could help combat inflation.

Inflationary pressures continue

The latest figures from the Office for National Statistics showed an increase of 2.8% to the headline rate of inflation for the year to July, a decrease of 0.1% on the previous month’s figure. The fall in inflation was driven by declines in the price of air fares plus movements in the recreation and clothing sectors but these were partially offset by price rises in both petrol and diesel.

To put this into context, this means that UK consumer prices index inflation has remained above the Bank of England’s 2% target since December 2009.

Watching closely

Savers and investors are closely watching inflation data after Bank of England governor Mark Carney said he would not consider lifting interest rates until the unemployment rate falls to 7%, unless the outlook for inflation deteriorates or risks to financial stability emerge.

In addition, he confirmed that until the job numbers target was met, the Bank would not reduce its £375bn quantitative easing programme. Mr Carney added: “It is important to stress that forward guidance does not mean the Monetary Policy Committee is promising to keep interest rates low for a particular period of time. The path of Bank Rate and asset purchases will, as always, depend on economic conditions.”

According to official figures the UK’s unemployment rate is presently 7.8%. However, according to its latest Inflation Report, the Bank of England expects median unemployment to stand at 7.3% per cent over the next three years, meaning the base rate is likely to remain at its historic low throughout the forecast period with no shift on the horizon until 2016 at the earliest. This is not good news for savers.

What might happen to inflation?

Whether this policy of forward guidance on interest rates proves successful or not is yet to be seen but what is clear is that there is every possibility that reassuring the markets that interest rates are to remain at historic lows for the foreseeable future could drive inflation up.

IHS Global Insight chief UK and European economist Howard Archer says: “Looking ahead, consumer price inflation may yet touch 3% in the near term, but it should start heading gradually down towards the end of the year.” The view of the Monetary Policy Committee is that it is more likely than not that the Consumer Price Index 18 to 24 months ahead will be 0.5% or more above the 2% target – more bad news for savers and investors alike.

The effect of inflation should be a key deciding factor

One of the most important considerations before making any savings or investment decision is to understand the potential impact of inflation. In combination with our own tax treatment and the effect of any charges on our returns, this can have a significant effect on the most important reason for parting with our hard earned cash – the return we get in our pocket or the net return.

Based on savings rates currently available, 3% fixed per annum may look like a top deal, but with inflation currently running at 2.8% you are only making 0.2% each year and if you are at least a basic rate tax payer, you are losing money in real terms with a negative return of -0.4% net each year at best. This is clearly a serious situation and the longer you fix for, the more pronounced the impact will be.

With poor returns on fixed rate bonds continuing and interest rates looking set to remain at their record low for some time, adding the opportunity to receive higher returns within your savings portfolio is becoming a stronger consideration. As with other savings products, all of these plans are capital protected and eligible for FSCS protection.

Our selection of fixed rate bond alternatives includes Investec’s Target Income Deposit Plan which offers the potential to provide 5% income each year. The closing level of the FTSE 100 Index is taken on 15th October 2013 and if the value of the Index finishes higher than 90% of this closing level at the end of each year (subject to averaging), you receive 5%. If the Index finishes below 90%, no income will be paid but should it meet the required level on any future anniversary, any missed payments will be added back.

For those looking for growth, the Growth Deposit Bond from Legal & General also links your return to the stockmarket in order to give you the potential for higher returns. Rather than guaranteeing an annual rate of interest, the plan will return 100% of any rise in the FTSE 100 at the end of the six year term (subject to averaging and a maximum return of 35%).

For those with a shorter timeframe in mind, the Kick Out Deposit plan from Investec offers the potential to receive high returns at the end of each year from year 2 onwards. Provided the value of the FTSE 100 Index at the end of years 2, 3, 4 or 5 is higher than its value at the start of the plan (subject to averaging), even by just one point, then the plan will mature early and provide a return of 4.25% for each year (not compounded) – that’s a potential 8.5% in just 2 years. If the Index is lower on all of these dates, you will only receive a return of your initial deposit at the end of the six year term.

Fair Investment view: With leading fixed rate bonds only offering around 2.2% over two years and only around 3% if you fix for five years, the combination of capital protection and the potential for a higher rate offered by this deposit could be the answer to those who are frustrated with low savings rates.Click here for more information about the Investec Kick Out Deposit Plan »

Income investments – fixed income more than double current inflation levels

By putting your capital at risk you open up opportunities for potentially higher returns which in turn could combat any future rise to inflation. If you are looking for income, Investec’s Enhanced Income Plan provides you with 5.76% fixed each year (0.48% each month), paid to you regardless of the performance of the stock market.

The plan also contains conditional capital protection which means that your initial investment will be returned in full unless the FTSE 100 Index falls by more than 50% during the investment term. If it does, and the Index also finishes below its starting level then your original capital will be reduced by 1% for each 1% fall - therefore, this plan should only be considered if you are prepared to lose some or all of your investment.

Fair Investment view: This investment should appeal to income investors because of the high level of income and monthly payments, however it could equally appeal to fixed rate savers prepared to put their capital at risk in return for a high fixed income, as they face significant falls in the level of income available from fixed rate bonds. It is also available as a Investment ISA and accepts ISA transfers which would then produce a competitive and fixed tax free income. Click here for more information about the Investec Enhanced Income Plan »

Kick out plans have been the real investment story of the last couple of years with their ability to mature early each year, normally from year one or two onwards depending on the plan, thereby offering the potential for competitive returns within a relatively short investment timeframe.

One popular investment is Investec’s Enhanced Kick Out Plan. Should the value of the FTSE at the end of each year from year one onwards be higher than its value at the start of the plan (subject to averaging), you will receive 7.75% for each year it has been in place (not compounded). Your capital is at risk if the FTSE falls by more than 50% during the 5 year investment term and finishes below its starting value, in which case it will be reduced by 1% for each 1% fall.

Fair Investment view: This investment could be for those who are finding it difficult to decide whether now is a good time to invest in the UK stock market since although the FTSE does have to go up in order to provide a return, this can be by just one point. It also offers the potential for high returns from as early as 12 months.Click here for more information about the Investec Enhanced Kick Out Plan »

For those investors who would prefer to have some protection against a slightly falling market the Defensive Kick Out Plan from Morgan Stanley offers a competitive annual return of 9% (not compounded) provided the FTSE at the end of each year (from year 2 onwards) is no more than 5% below its value at the start of the plan. The plan’s conditional capital protection means that your initial investment is returned in full unless the FTSE 100 falls by more than 50% during the term and is also below 95% of its starting value at the end of the 6 years. In this case your initial capital will be reduced by the same amount as the fall in the Index.

Consider your options carefully

With the pressure firmly on savers to consider the continuing impact of record low savings and interest rates, it is wise to consider your options carefully, especially in light of the uncertainty over what might happen to inflation.

Recent trends are seeing savers looking to take on more risk with some of their capital in the hunt for potentially higher returns in an attempt to offset falling fixed rate bond yields.

Don’t forget ISAs and ISA transfers

All of these plans are eligible for new ISAs (the ISA allowance for the current 2013/14 tax year is £11,520) and accept ISA transfers. For the savings plans you can set up a new Cash ISA with a maximum allowance of up to £5,760 and they also accept Cash ISA transfers. The investment plans are eligible for new ISA investments up to the maximum ISA allowance of £11,520 and accept Cash ISA and Investment ISA (Stocks and Shares) transfers.

Please note that if you transfer a Cash ISA into an Investment ISA you cannot then move it back into a Cash ISA. The tax treatment depends on legislation and your individual circumstances which may change in the future. These savings and investment options have competitive minimum investment limits, starting from as low as £500.

No news, feature article or comment should be seen as a personal recommendation to invest. Prior to making any decision to invest, you should ensure that you are familiar with the risks associated with a particular plan. If you are at all unsure of the suitability of a particular product, both in respect of its objectives and its risk profile, you should seek independent financial advice.

The alternative savings options referred to in this article are structured deposit plans that are capital protected. There is a risk that the company backing the plan or any company associated with the plan may be unable to repay your initial investment and any returns stated. In this event you may be entitled to compensation from the Financial Services Compensation Scheme (FSCS), depending on your individual circumstances. In addition, you may not get back the full amount of your initial investment if the plan is not held for the full term. The past performance of the FTSE 100 Index and any of it shares is not a guide to its future performance.

The investments referred to are structured investment plans that are not capital protected and there may be the risk of losing some or all of your initial investment. There is also a risk that the company backing the plan or any company associated with the plan may be unable to repay your initial investment and any returns stated, in which case you may not be entitled to compensation from the Financial Services Compensation Scheme (FSCS). In addition, you may not get back the full amount invested if the plan is not held for the full term. The past performance of the FTSE 100 Index is not a guide to its future performance.